Accessing Resources for Growth from External Sources Chapter 14 Accessing Resources for Growth from External Sources McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

Learning Objectives To understand how joint ventures can help an entrepreneur grow his or her business and acknowledge the challenges of finding, and maintaining, an effective joint venture relationship To be aware of the pros and cons of using acquisitions to grow a business and to know what to look for in an acquisition candidate

Learning Objectives To understand the possibilities of achieving growth through mergers and leveraged buyouts and the challenges associated with each To understand franchising from the perspective of both the entrepreneur looking to reduce the risk of new entry and the entrepreneur looking for a way to grow his or her business

Learning Objectives To understand the tasks of negotiation and develop the skills to more effectively conduct these tasks

Using External Parties to Help Grow a Business Mechanisms Joint ventures Acquisitions Mergers Franchising

Joint Ventures A separate entity that involves a partnership between two or more active participants Types of joint ventures: Between private-sector companies Objectives - Entering new/ foreign markets, raising capital, cooperative research Industry-university agreements Created for the purpose of doing research International joint ventures

Joint Ventures Factors in joint venture success Accurate assessment of the parties involved to best manage the new entity Degree of symmetry between the partners Expectations of the results of the joint venture must be reasonable Timing

Acquisitions Purchasing all or part of a company Advantages of an acquisition Established business Location Established marketing structure Cost Existing employees More opportunity to be creative

Acquisitions Disadvantages of an acquisition Synergy Marginal success record Overconfidence in ability Key employee loss Overvaluation Synergy “The whole is greater than the sum of its parts” Should occur in both the business concept and the financial performance

Acquisitions Structuring the deal Involves the parties, the assets, the payment form, and the timing of the payment Two most common means of acquisition Entrepreneur’s direct purchase of stock or assets Bootstrap purchase of assets

Acquisitions Locating acquisition candidates Brokers: People who sell companies Accountants, attorneys, bankers, business associates, and consultants may know of candidates Business opportunities in newspapers or trade magazines

Mergers Joining two or more companies Key concern - Legality of the purchase Process: Determine the merger objectives and resulting gains for both companies Carefully evaluate the other company’s management

Mergers Determine the value of a merger candidate Determine the value and appropriateness of the existing resources Establishing a climate of mutual trust Determine the value of a merger candidate

Figure 14.1 - Merger Motivations

Leveraged Buyout Purchasing an existing venture by any employee group Acquired firm’s assets serve as collateral Long-term debt financing is provided by banks, venture capitalists, and insurance companies Evaluation procedure: Determine whether asking price is reasonable Assess the firm’s debt capacity Develop the appropriate financial package

Franchising Franchisor gives exclusive rights of local distribution to: A franchisee in return for payment of royalties and conformance to standardized operating procedures Franchisor: Person offering the franchise Franchisee: Person who purchases the franchise

Franchising Advantages of franchising - To the franchisee Product acceptance Has an accepted name, product, or service Management expertise Managerial assistance provided by the franchisor Capital requirements Up-front support can save entrepreneur significant time and capital

Franchising Advantages of franchising - To the franchisee Knowledge of the market Offers experience in business and market Operating and structural controls Helps in standardization and administrative controls

Franchising Advantages of franchising - To the franchisor Expansion risk Allows venture to expand quickly using little capital Business can be expanded nationally and internationally Requires fewer employees than a non-franchised business Cost advantages Supplies can be purchased in large quantities to achieve economies of scale Commit larger sums of money to advertising

Franchising Disadvantages of franchising Inability of the franchisor to provide services, advertising, and location Franchisor’s failing or being bought out by another company Difficulty in finding quality franchisees

Franchising Poor management can cause individual franchise failures The ability to maintain tight control over franchises becomes difficult as their number increases

Franchising Types of franchises Dealership - Acts as a retail store for the manufacturer Franchise that offers a name, image, and method of doing business Franchise that offers services

Franchising Changes that helped evolve franchising opportunities: Good health Time saving or convenience Health care The second baby boom

Investing in a Franchise Factors to be assessed before making the final decision: Unproven versus proven franchise Financial stability of franchise Potential market for the new franchise Profit potential for a new franchise

Investing in a Franchise Franchisors are required to make a full presale disclosure Franchise agreement contains the requirements and obligations of the franchisee

Table 14.2 - Information Required in Disclosure Statement

Table 14.2 - Information Required in Disclosure Statement

Overcoming Constraints by Negotiating for More Resources Distribution task: Negotiating how the benefits of the relationship will be allocated between the parties Integration task: Exploring possible mutual benefits from the relationship so that the “size of the pie” can be increased

Overcoming Constraints by Negotiating for More Resources Assessment 1: What will you do if an agreement is not reached? Best alternative to a negotiated agreement Helps to determine a reservation price Reservation price: Price at which the entrepreneur is indifferent about whether to: Accept the agreement or choose the alternative

Overcoming Constraints by Negotiating for More Resources Assessment 2: What will the other party to the negotiation do if an agreement is not reached? Difficult to assess reservation price Bargaining zone: Range of outcomes between the entrepreneur’s reservation price and that of the other party

Overcoming Constraints by Negotiating for More Resources Assessment 3: What are the underlying issues of this negotiation? How important is each issue to you? Focus on achieving aspects most desirable by trading off aspects of less importance

Overcoming Constraints by Negotiating for More Resources Assessment 4: What are the underlying issues of this negotiation? How important is each issue to the other party? Provides the entrepreneur an opportunity to sacrifice aspects of less importance to him/ her but of high importance to the other party

Overcoming Constraints by Negotiating for More Resources Negotiation strategies Build trust and share information Ask lots of questions Make multiple offers simultaneously Use differences to create trade-offs that are a source of mutually beneficial outcomes